A strong cash flow is one of the key factors to creating a sustainable manufacturing organization. There is a constant need for cash to flow into the business to stay on top of production schedules, consistently meet the customer needs, and grow the business. No matter how great the business model is or how high the product demand is, poor cash flow can disrupt the entire operations and growth. Research indicates that 82% of business failures are due to poor cash management. It is critical to effectively manage the cash flow to avoid putting the future of business in jeopardy. Here are six effective ways to improve cash flow.
Promptly sending invoices to the customers is one of the best ways to avoid delayed payments and improve cash flow. As per research, 46.2% of invoices remain unpaid as of the due date. This staggering figure is supported by Export Finance Solutions, who found that companies pay on average seven days late. Another study found that small businesses in manufacturing have an average of $96,000 in unpaid invoices and it takes 21 days to get paid. Hence organizations must implement effective and robust plans to ensure that invoices are getting paid on time.
Invoices with accurate data, regular follow-up on upcoming due dates, sending statements of current outstanding invoices will help immensely to eliminate late payments. Simplifying the invoicing process through automation, implementing software tools and easy payment options will help in streamlining the invoicing process to speed up payments and increase cash flow.
Cash flow is heavily influenced by the payment terms extended to the customers. Whilst it is critical to send invoices on time, it is essential to implement balanced payment terms. These terms should be clearly stated at the time of signing the contract. A recent study showed that the average payment term is 32 days, yet the average actual payment length is 55 days. If the customers are unable to meet the payment terms, look for alternative solutions. For example, provide customers with installment options or offer discounts for early/faster payments. Also, keeping track of late payers with quick follow up will help to avoid delayed payments. At times it may be necessary to renegotiate terms with the late payers or implement penalties for the late payment.
Additionally, conducting a credit check before working with a customer is a simple and effective way to reduce non-payment/delayed payment and avoid cash flow problems. A credit check will help to better understand the financial risk of working with a customer and whether or not they are likely to make their payments on time. This can significantly improve short-term cash flow and help reduce the risks.
Another effective way to improve cash flow is to reduce operating expenses. In the manufacturing industry, operating expenses make up the bulk of the overall costs. To help reduce these costs, remove inefficiencies/waste within the business. This can be done through automation and continuous process improvements which will help streamline the internal operations. According to a study by Okuma Corporation, it’s realistic to see up to a 30% increase in production by using automation in the manufacturing process. This can significantly decrease operating expenses and thus improve cash flow.
Also, purchasing efficient machines/equipment will help in enhancing the overall productivity and efficiency leading to increased production and consistent in-flow of cash in the long run. Diligently keeping track of the expenses will further help to avoid unnecessary expenses and reduce the cash going out of the business.
Product price is commonly overlooked in the manufacturing industry. A common trend within the industry is that new entrants will try to undercut the competition as a strategy. Whilst this works as a short term solution, it fails as a long term strategy. Not only will this potentially damage the cash flow, but it will also create the impression that the product is cheap. This can consequently damage the brand and reputation.
When developing a pricing strategy, it is important to look at fulfillment cost, competitor pricing as well as maintaining a buffer for flexible pricing. An important aspect of pricing is determining the “value” for the customers. If the customer sees the “value” of the product/services, then the price will not be the key factor for making their purchasing decision. This will help in lowering the price sensitivity resulting in improved cash flow and profit margins.
Most of the manufacturing industries have a substantial amount of cash tied up in inventory. It is vital to ensure appropriate inventory levels are maintained to operate efficiently and consistently meet customer needs. Forecasting demand is critical, meaning having sufficient inventory to seamlessly process customer orders. Incorrect forecasting will result in a surplus or insufficient stock. Overstocked inventory ties up cash that otherwise can be invested in other areas to meet business needs. On the other hand, not enough inventory will risk not being able to fulfill the orders leading to lost sales and unhappy customers. This could further lead to a potential loss of new sales. Having a robust stock management system can significantly enhance productivity and efficiency, helping organizations to reduce inventory costs and enhance the speed to fulfill orders. Doing so will have a positive impact on the cash flow.
Often manufacturing industries invest heavily in purchasing equipment and other assets without fully understanding the need, resulting in increased operating expenses that further impact the cash flow. To invest prudently, it is necessary to have a comprehensive understanding of the business needs. These include equipment, materials, and other resources. According to Forbes, 20% of every dollar spent in the manufacturing industry is wasted – adding up to $8 Trillion every year. Avoiding such expenses can help to reduce unnecessary costs and waste, which will have a positive impact on the cash flow.
Cash flow is vital for maintaining healthy finances. Implementing these strategies is a great way to boost and maintain a positive cash flow. With 82% of all businesses failing due to poor cash management, staying on top of the cash flow is not just an option but a critical aspect to successfully run the business.